IK wins Swedish carry tax case

On Wednesday IK Investment Partners won a court decision against Swedish Tax Agency Skatteverket, who claimed that carried interest payments received by the firm’s partners between 2005 and 2008 should have been taxed as ordinary income and not as a capital gain.

IK received the favorable decision after the court concluded Skatteverket had not prepared their original tax reassessment decision correctly.

In Sweden, tax authorities must disclose certain information about how they reach a particular tax decision. For IK, these disclosures were communicated “in a very poor way”, said Torgny Wetterberg, a partner at law firm A1 Advokater, who acted as lead counsel for IK.

The court ruled that Skatteverket did not adequately explain the basis of its decision to treat carried interest under ordinary income rates, which can be as high as 57 percent in Sweden. As it stands, IK and its executives will not have to pay a SEK 1.7 billion ($262 million; €194 million) tax bill charged by the tax agency. Skatteverket has the option to appeal the decision.

Legal sources predict that Sweden’s Supreme Court will ultimately settle Sweden’s ongoing carried interest tax debate. IK is one of many firms operating in Sweden that is being taken to court over carried interest payments.

The IK ruling will not impact those sister tax cases. “The IK decision contains no reasoning from the court as how carried interest should be taxed,” said Mats Anderson, Swedish-based tax counsel at Linklaters.

This is because the Tax Agency’s claim was thrown out due to a technicality. “The court was not entitled to look into the question of carried interest and rule on that question because they had to start on this formal question,” said Wetterberg.